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February 25, 2015

Late last year, the New York Court of Appeals issued an interesting opinion: In Mary Veronica Santiago-Monteverde v. John. S. Pereira, 24 N.Y.3d 283 (2014), the Court held that a bankruptcy debtor’s interest in her rent-stabilized apartment is exempted from her bankruptcy estate as a “local public assistance benefit.”

The debtor lived in Manhattan for 40 years in a rent-stabilized apartment. In 2011, after her husband passed away, she became unable to pay her credit-card debts, which totaled about $23,000, and she subsequently filed for Chapter 7 bankruptcy. In her initial filing, the debtor listed her apartment lease as an ordinary unexpired lease.

The debtor’s landlord offered the trustee a deal: The landlord would pay the $23,000 credit-card debt in exchange for the debtor’s interest in the lease and would continue to let the debtor live in the apartment at the rent-controlled rate of $703 a month for the rest of her life. The “catch,” so to speak, is one that anyone living in any of New York’s approximately one million rent-controlled apartments would quickly recognize: If the debtor’s interest in the lease were regained by the landlord, then the debtor’s son, who shares her apartment, would not be able to inherit the lease and keep paying the rent-controlled rental rate. Consequently, when the trustee advised the debtor that her interest in the lease was to be sold, the debtor amended her bankruptcy schedules to list the value of her lease as personal property exempt from the bankruptcy estate under New York Debtor and Creditor Law § 282(2) as a “local public assistance benefit.”

The Bankruptcy Court, granting a motion by the trustee, struck the claimed exemption and said that “the benefit of paying below market rent is not a ‘public assistance benefit’ that is entitled to any exemption in bankruptcy” and that the benefit “is a quirk of the regulatory scheme in the New York housing market, not an individual entitlement.” In re Santiago-Monteverde, 466 B.R. 621 (Bankr. S.D.N.Y. 2012).

The District Court affirmed, and the United States Court of Appeals for the Second Circuit certified the “local public assistance benefit” question to the New York Court of Appeals. In disagreeing with the decision of the Bankruptcy Court, the New York Court of Appeals noted that “When the rent-stabilization regulatory scheme is considered against the backdrop of the crucial role that it plays in the lives of New York residents, and the purpose and effect of the program, it is evident that a tenant’s rights under a rent-stabilized lease are a local public assistance benefit.” 24 N.Y.3d at 289. The Court also indicated that the Bankruptcy Court’s description of the rent stabilization program as “quirk of the regulatory scheme in New York…” may be true, but the fact that it is a local quirk lends credence to the debtor’s claim that it is in fact a local public assistance benefit.

While the rent-stabilization program does not provide payments directly to participants in the way that many traditional public assistance programs do, the Court held that the program conferred a clear benefit on the debtor that was intended by the legislature that created the program. The Office of the New York Attorney General and the city’s Law Department agreed and filed a joint brief in the case arguing that the sale of the lease would undermine the benefits intended to be provided by rent stabilization. Indeed, had the Court held the opposite, it would have become easier for landlords to evict rent-stabilized tenants who filed for bankruptcy by purchasing their leases from the trustee, charging market rent (rather than offering to allow the debtor to remain at a stabilized rate, as the landlord in this case did), and then evicting the tenants who could no longer afford the rates.

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